Random Money/Business/Finance Thoughts Thread

Use this thread to state random thoughts when you don't find it necessary to start a new thread with respect to such. This thread is completely laid back. There need not be any logical thought flow between posts. Random gems and nuggets are encouraged.

The idea is for this thread to continually spit out new topics with respect to these issues; i.e. earnings reports, stock talk, new products, blogrolls, etc.; basically anything and everything that doesn't necessarily require a thread of its own. Hopefully, the randomness will solicit a greater volume of Money Board posts from those who just want to share random thoughts but are scared of being "the guy who starts threads that get no responses."

Here's my first thought:

I'm on a Mac and am fed up with Safari. It sucks. It crashes incessantly usually when I'm in the middle of doing something important. It's completely updated and while googling a solution I found a whole host of "solutions" from people who are not Apple representatives, each of which failed to solve my problem, while at the same time finding virtually nothing from Apple's support website. I could call Apple, but I feel like I shouldn't have to. It's a browser for crying out loud. Make it work.

With that said, I'm either going Firefox or Chrome. Screw Safari! Anyone have any preference with respect to either?

I downloaded Chrome and used it for a Very short period. After an update, I checked my firewall and it was turned off. This happened right after the download update. Don't know what happened and my virus program did not pick it up.

1. Scoop will be here momentarily to e-rape you. 2. I have used Chrome since it came out. Firefox was great, but the best feature (add-ons) made it so slow it wasn't worth it. Chrome is just a better (and for me, since I use google stuff, more integrated) version of FF. FF is still a great browser though.

Why are people so dogmatic and scared when IRR has multiple solution points or when the derivative of IRR is disussed (i.e. it has both magnitude and direction)? "Bah. IRR is no good, since it has multiple solutions." Why not interpret anyway?

I believe IRR has both magnitude and direction. In addition, my experience is that one of the IRR's is often pretty unstable and might go away with small tweaks in input variables.

NPV profiles are underutilized and can answer a lot of questions. Note the NPV at 0% and also whether the deriviative of each IRR solution (of NPV with respect to IRR) is positive or negative.

One personal argument from the past is when an investment ran with a 6% IRR, so colleague said it fell below the investment hurdle rate of 10%. However, the derivative was actually positive at this point, indicating that value was created at any discount rate greater than 6%. Why? Because it was a project to accelerate revenues that therefore lost value on an undiscounted basis but actually created value on any time value of money of at least 6%. He is a very smart guy but refused to listen to this argument due to a dogma of 6% being "the IRR", even though NPV was clearly positve at 10%.

So, even if you let a computer solve for IRR, check the derivative and interpret accordingly. Try seeding a solver close to zero. Better yet, use an NPV profile. And next time you find multiple IRR solutions, see if one goes away with mild sensitizing on key input variables.

Edited to add: I just remembered a case where the second IRR is more meaningful than the first. You might have a cash flow stream with a huge liability out in the future, enough to make the undiscounted cash flow negative overall. However, the liability is so far out in the future that the negative NPV impact of it is small at any reasonable discount rate. What you will see on an NPV profile is two IRR's - both meaningful.

The first IRR is a fairly small discount rate where the NPV crosses over to positive - this represents the discount rate above which your future liability no longer drags the NPV negative overall. The second IRR is the traditional solution where NPV crosses over to negative. This is what I would consider the most representative IRR for this investment, with the caveat that your discount rate is at least as high as the first IRR.

Again, just another example where both IRR's are meaningful and can be correctly interpreted with the derivative of NPV with respect to discount rate. But many NPV purists would scoff that this is just another example of IRR being invalid due to multiple solutions. Plus, both IRR's in this example are fairly mathematically stable with respect to input variable fluctuations.

I had never thought of it in those terms, eg magnitude and direction, but certainly that is true. I feel like most of the stuff I've been taught heavily leans towards NPV over IRR, given both. You lost me here though:

quote:One personal argument from the past is when an investment ran with a 6% IRR, so colleague said it fell below the investment hurdle rate of 10%. However, the derivative was actually positive at this point, indicating that value was created at any discount rate greater than 6%. Why? Because it was a project to accelerate revenues that therefore lost value on an undiscounted basis but actually created value on any time value of money of at least 6%. He is a very smart guy but refused to listen to this argument due to a dogma of 6% being "the IRR", even though NPV was clearly positve at 10%

Got it now. The higher the benchmark rate you put into your formula, the more your NPV increased, showing that NPV is the more exact fundamental formula, although people usually prefer the ease of using IRR in practice.

Draw an NPV profile by hand, with discount rate on the x-axis and NPV on the y-axis. Start with negative NPV at 0 percent discount rate. Draw the line up and to the right, crossing at 6 percent. 6 percent is still the IRR, but you create value at discount rates greater than that. This is counterintuitive if you see IRR without direction. This effect is typical of revenue acceleration projects.

quote:Got it now. The higher the benchmark rate you put into your formula, the more your NPV increased, showing that NPV is the more exact fundamental formula, although people usually prefer the ease of using IRR in practice.

Actually, my point is that IRR is still in fact the most useful result. Instead having to assume a discount rate to test at various points for positive NPV, you now know that NPV is positive if discount rate or cost or capital is at least 6%. People like to throw IRR under the bus, but even in the example above it is superior to NPV if interpreted rigorously.